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Back in the Dark Ages — before last summer — KeyBank USA hired temporary workers the old-fashioned way, which is to say inefficiently and expensively. If IT managers, for example, needed programmers or Web developers for a three-month project, they’d typically E-mail requests to a few favorite suppliers. Then they’d wait a couple of weeks for responses to trickle in. Then they’d choose a supplier — not necessarily the one with the lowest quote, or one of the bank’s officially preferred vendors — and start the purchase order on its lengthy internal journey. “We had a lot of handoffs,” acknowledges Debbie Manos, senior vice president and chief sourcing officer at the Cleveland-based bank, which has about 900 branch locations in a dozen states.

At last the workers would show up, but the company was limited in its ability to assess them; it didn’t know, for example, how many qualified workers each vendor made available, or how well those workers performed. So the next time managers went looking for programmers or developers, they’d start from scratch. Given that the bank might have as many as 1,500 IT contract employees on staff at any one time, the “system” was clearly costing precious time and money.

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Companies in all sectors approach the hiring of temporary workers, be they IT contractors, administrative help, extra accounting staff, or any other sort of employee, in much the same way. Most companies, in fact, spend more on such services than they do on hard goods — up to 70 percent of a total procurement budget by some estimates.

Several years ago, “services E-procurement” came on the scene, offering companies a way not only to automate the hiring of temps but also to buy travel, printing, maintenance, legal, and other services via the Internet. So far, however, it has proven most popular in taking some of the labor out of hiring labor. At KeyBank, managers now log onto the company’s services-procurement system, Ariba Workforce, and specify what they need (for instance, “Web developers, high proficiency, three-month project, Cleveland area”). The system automatically routes the request to the bank’s preferred suppliers, which have three days to respond with candidates. The managers make their choices, and because they are hiring only from preapproved vendors (the request is first sent to a list of 10 suppliers; if a manager wants more bids, he or she can extend the query to a second tier), the system automatically generates a purchase order for the transaction and a permanent record for the employee.

“It takes all the subjectivity out of the process,” says Manos, whose company uses similar applications for buying supplies and managing travel expenses. “And six months from now, if [a project manager] has the same kind of need, he can search for people he’s used in the past, or that other project managers have used.” More than 11,000 KeyBank employees now use the system, generating substantial savings by getting competitive bids from a few preferred suppliers. Manos expects KeyBank to recoup its costs within 18 months.

Straight from the Sourcing

While KeyBank ranks among the pioneers in services E-procurement, its experience is hardly unique. After two years of downsizing and belt-tightening, companies of all sizes are now looking for novel ways to cut costs. For that reason, they’re taking a hard look at just how much they spend on services — and how little control they bring to it. The area is of particular interest to CFOs and finance departments, says analyst Christa Degnan of Aberdeen Group Inc., because “companies know there’s some fat they can trim in services, but they’ve lacked visibility and control in this area.”

Depending on the industry, analysts say, services can account for 30 to 70 percent of all corporate spending. But because there’s often no centralized process for buying, tracking, and accounting for services, CFOs may have only the haziest picture of the total cost. In the Forrester Research/Elance Inc. December 2002 “CFO Omnibus Report,” half of the 152 finance executives surveyed admitted they didn’t know their companies’ ratios of goods and services spending.

At the same time, those CFOs readily recognized the need for change. They estimated that streamlining procurement practices could cut services spending by an average of nearly 10 percent. (That’s not exactly small change: at the typical Global 2,000 company, says Forrester, that translates into annual savings of nearly $95 million.) Not surprisingly, more than half the CFOs called finding new lower-cost sourcing alternatives a top priority for this year.

Less than two years ago, leading E-procurement vendors typically boasted just three or four pioneering corporate clients. Since then, with early adopters reporting savings of 10 to 30 percent, they’ve doubled or tripled their customer lists. In one case, Denver-based IQNavigator Inc. bagged 10 new Fortune 100 companies in less than 12 months; the four-year-old vendor’s trophies include International Paper Co. and Northrop Grumman Corp. Aberdeen’s Degnan sums it up this way: “2002 was the year that companies said, ‘These solutions make sense. They’re going to save money. Let’s try one.’ “

But that doesn’t mean the marketplace stabilized in 2002. Some vendors vanished; others merged or ended the year poised for acquisition by bigger rivals. Several staffing firms that had begun to develop their own procurement software pulled back, opting instead to partner with the same software companies they’d initially considered competitors. For instance, more than a dozen staffing agencies inked deals with CascadeWorks Inc. last year; they now use the San Francisco-based vendor’s technology to deliver their services.

Meanwhile, market leaders began beefing up their platforms’ features. CascadeWorks’s Clarity 4 (which also powers Ariba Workforce) can now handle contracts involving complex combinations of time-, project-, and fee-based services, and customers can now choose either a hosted Web-based model or a licensed software product. PeopleSoft Services Procurement translates information into eight languages, processes transactions in a variety of currencies, and can be localized for use worldwide.

The price tag for services E-procurement currently makes it prohibitive for most companies outside the Global 2,000. Start-up costs range from $250,000 to upward of $2 million, depending on company size, number and complexity of transactions, features selected, and whether the system is Web-based or licensed and run internally at customer sites. But for companies that routinely spend tens or hundreds of millions of dollars annually on contract help, even a 2 or 3 percent reduction adds up to a quick, sweet ROI.

A Call for Unity

Sprint Corp., in Westwood, Kansas, hopes for just that kind of payback when it rolls out PeopleSoft’s Services Procurement in August. Ted McBride, the telecom giant’s manager of E-commerce solutions, won’t say what the company paid for the product, which it will initially use for hiring IT contractors and later expand to include engineering and administration. Like KeyBank, though, Sprint expects to recoup its costs within a year.

Beyond the savings in labor, McBride cites an equally critical goal for Sprint’s investment: tying together a hodgepodge of systems and processes, part of a companywide campaign to create “one Sprint” from several historically distinct divisions. Currently, he says, some managers hire contractors through one of three systems, “none of which talk to each other.” Others use E-mail, faxes, or telephone calls, keeping records on Excel spreadsheets. Sprint already uses PeopleSoft products for finance, inventory, purchasing, accounts payable, and purchasing goods; that, McBride says, should make it easier to integrate services E-procurement into both the company’s existing systems and its culture. KeyBank opted for technology from Ariba for much the same reason: “There was already heightened awareness around the company that Ariba is the way you acquire things,” says KeyBank’s Manos. “It was easy to add services onto that.” How easy? Training for Ariba Workforce’s 11,000 users took less than one hour.

Both Sprint’s and KeyBank’s choices reflect a prevailing attitude on the part of many customers: opting for technology from familiar and established suppliers because of fears that smaller software companies won’t survive a shakeout. Some vendors have gained traction through partnerships that helped them be part of deals they might not have been able to win on their own. CascadeWorks licensed its technology to Ariba, benefiting from the bigger company’s existing relationship with KeyBank. IQNavigator teamed with human- resources outsourcing giant Exult Inc. to land International Paper’s services-procurement business. Warns Andrew Bartels, vice president and research leader at Giga Information Group Inc. in Cambridge, Massachusetts: “We have a lot of vendors who have pioneered this thing — and not all of them are going to make it.”

Choosing a well-established vendor doesn’t guarantee a trouble-free transition. KeyBank’s project hit a serious roadblock because of one seemingly simple request: the bank wanted users to be able to access both Ariba Buyer and Ariba Workforce with a single log-on. Creating that capability has turned out to be technically impossible at the moment. And many large companies may have an established brand name, but nonetheless have posted losses and even precipitous declines in revenue during the past year. A study by consulting firm A.T. Kearney Inc. found that procurement systems (of all sorts, not only those focused on services) often fared well in pilots but failed to pay off when broadly implemented, because of integration issues and the difficulty in getting employees to deviate from current practices.

Some surveys suggest, however, that E-procurement is a green-field opportunity. Currently, companies use it for just 2 percent of their total purchases, according to a Stanford University survey of 168 corporate buyers. But those same buyers said they expected to buy 11 percent of their purchases electronically by the end of 2004.

Meanwhile, early adopters keep finding ways to turn efficiency into savings. Kim Chapman, who oversees contingent-workforce management at Shell Oil Products USA in Houston, says that by using technology from IQNavigator, his company has streamlined its processes significantly. “It cuts a lot of people out of the process,” he says. “I get an E-mail with [a temporary worker’s] time, I can approve or reject it, and I can pay the supplier directly.” So once the system was launched last December, Chapman began renegotiating contracts, arguing that in return for those prompt payments, suppliers should cut their rates or offer early-payment discounts. Many did. And those that didn’t? “We’ve changed the portfolio of who we do business with,” he says.

Controlling relationships as well as costs: that’s a bottom-line benefit that makers of services E-procurement software will no doubt leverage as they try to drive their products further into the market.

Quick quiz: Approximately what percentage of your company’s total spending goes for services? Chances are that when you add it all up it’s far more than you guessed. According to a survey of 115 large companies conducted by the Center for Advanced Purchasing Studies (CAPS) in Tempe, Arizona:

Companies spend more on services than supplies. Services spending averaged 33 percent of the total corporate spend, compared with 21 percent for such indirect goods as office supplies. While direct goods, such as production raw materials, still accounted for the majority, averaging 51 percent, CAPS did find one company that spent 86 percent of its procurement budget on services. (Studies from AMR Research Inc., Aberdeen Group Inc., and elsewhere estimate services-related spending at 30 to 70 percent, depending on the industry.)

Many spend more than necessary. Maverick — or off-contract — buying is more rampant for services than it is for direct or indirect goods.

Some expect to keep spending more. Twenty-five percent of those surveyed plan to increase services spending by 10 to 50 percent in the next few years.

Companies manage huge service-supplier networks. Those surveyed averaged nearly 75 active suppliers per purchasing employee. That was more than double the number of vendors per buyer for direct goods and 20 percent more than for indirect goods.

Nobody’s in charge. At participating companies, purchasing departments tended to control spending for only a few of nearly 40 services categories ranging from accounting to landscaping to waste removal. Purchasing often had little or no control in areas with big-ticket services expenditures, such as telecommunications, information technology, and legal help.

And Now the Bad News

After years of hype and high investment, reality has set in among corporate E-procurers. In the late 1990s, company after company thought wonderful things would happen to their bottom lines if they began sourcing and purchasing goods and services on the Internet. Back then, IT experts predicted with glee that “big-bang” E-procurement systems designed for massive corporatewide implementations would save companies anywhere from 25 to 60 percent of costs and bring widespread process benefits.

For the most part, companies are still waiting for predictions like those to come true. Research reveals a massive gap between expectations and real-life experience, resulting in many E-procurement projects being scaled down and spending cut back.

“The key thing we’ve learned about E-procurement is that it’s best to take an incremental approach rather than throw everything at it and hope you’re going to get a rapid return,” says Ian Taylor, head of group procurement at Halifax Bank of Scotland (HBOS), a U.K. financial-services firm. Since April 2000, Taylor has been building E-procurement systems for HBOS to support 2,000 users at more than 1,000 sites. “We wanted a safe, lower-cost incremental solution,” he says. So far the bank has managed to cut staff time spent on procurement and achieve lower prices on certain goods, such as stationery. Now it’s focusing on applications for such higher-cost items as uniforms; it’s also moving into services E-procurement, notably for temporary staff.

Taylor says it was important that the applications were developed incrementally. “We were able to prove each stage internally as we went along and easily adapt things to suit our own needs,” he says. “We also collaborated closely with our suppliers to ensure that they could take the technology on board at each step of the way. We haven’t achieved nirvana in terms of absolute integration with their systems, but we’ll get there.”

At Volkswagen, Meike-Uta Hansen, B2B head of purchasing, says she “started with small but effective projects such as certain aspects of online negotiation.” Two years and an estimated $29 million later, VW has built an auction site to support all operating companies and all brands, including VW, Audi, Seat, and Skoda. The auction system has saved the company 20 percent on procurement costs, but Hansen believes there’s more work ahead. “We have reduced lead times, cut costs, reduced staff levels, and negotiated better terms, and that’s wonderful,” she says. “But every company is going through a major learning process. People have to realize it is still very early days for sourcing and procurement systems.” —Paul Tate